The Uncertainty Trade-off: Reexamining Opportunity Costs and War

Abstract

Conventional wisdom about economic interdependence and international conflict predicts that increasing opportunity costs make war less likely, but some wars occur after costs grow. Why? We develop a model that shows that a nonmonotonic relationship exists between the costs and probability of war when there is uncertainty over resolve. Under these conditions, increasing the costs of an uninformed party's opponent has a second-order effect of exacerbating informational asymmetries about that opponent's willingness to maintain peace. We derive conditions under which war can occur more frequently and empirically showcase the model's implications through a case study of Sino-Indian relations from 1949 to 2007. This finding challenges how scholars traditionally believe economic interdependence mediates incentives to fight: instruments such as trade have competing effects on the probability of war.